NATIONAL CONFERENCE OF INSURANCE LEGISLATORS
PROPERTY-CASUALTY INSURANCE COMMITTEE
NAPA VALLEY, CALIFORNIA
NOVEMBER 10, 2006
DRAFT MINUTES
The National Conference of Insurance Legislators (NCOIL) Property-Casualty Insurance Committee met at the Marriott Napa Valley Hotel & Spa in Napa Valley, California, on Friday, November 10, 2006, at 9:00 a.m.
Sen. Pam Redfield of Nebraska, chair of the Committee, presided.
Other members of the Committee present were:
Rep. Donald Brown, FL Rep. Donald Flanders, NH
Rep. Terry Parke, IL Sen. Carroll Leavell, NM
Rep. Michael Ripley, IN Assem. William Barclay, NY
Sen. Ruth Teichman, KS Sen. Neil Breslin, NY
Rep. Ronald Crimm, KY Assem. Nancy Calhoun, NY
Rep. Dennis Horlander, KY Assem. Ivan Lafayette, NY
Rep. Susan Westrom, KY Sen. James Seward, NY
Rep. Shirley Bowler, LA Sen. Jay Hottinger, OH
Rep. Ed Gaffney, MI Sen. David Bates, RI
Rep. Jerry Kooiman, MI Rep. Brian Kennedy, RI
Rep. Jim Marleau, MI Rep. Craig Eiland, TX
Rep. Leslie Mortimer, MI Rep. Larry Taylor, TX
Sen. Alan Sanborn, MI Del. Harvey Morgan, VA
Sen. Dean Kirby, MS Rep. Virginia Milkey, VT
Rep. George Keiser, ND
Other legislators present were:
Rep. Debbie McCune Davis, AZ Rep. Frank Wald, ND
Sen. Jeff Chapman, GA Sen. Steve Stivers, OH
Sen. Ralph Hudgens, GA Rep. Ron Peterson, OK
Rep. Carl Von Epps, GA Rep. Tony Melio, PA
Rep. Robert Damron, KY Sen. Ann Cummings, VT
Rep. James Tucker, LA Rep. Kathleen Keenan, VT
Sen. Bob Dearing, MS Rep. Ernest Shand, VT
Rep. Dan Foley, NM Sen. Dan Kapanke, WI
Rep. Jerry Klein, ND
Also in attendance were:
Susan Nolan, Nolan Associates, NCOIL Executive Director
Candace Thorson, NCOIL Deputy Executive Director
Kevin Horan, NCOIL Director of State-Federal Relations
Mike Humphreys, NCOIL Director of Legislative Affairs & Education, Life, Health, and Workers’ Compensation Insurance
MINUTES
The Committee voted unanimously to approve the minutes of its July 21, 2006, meeting in Boston, Massachusetts.
SUBCOMMITTEE ON NATURAL DISASTER INSURANCE LEGISLATION
Sen. Redfield said she had served as Acting Chair of the Subcommittee when it met the previous day. Among other things, she said the Subcommittee had heard an update on pending federal natural disaster insurance legislation, as well as had begun initial consideration of a proposed Model State Uniform Building Code that she said would receive further attention at the NCOIL Spring Meeting. She said the model would, in part, establish structural building requirements in order to minimize losses from wind, flood, and earthquake in areas with significant catastrophe exposure.
Sen. Redfield overviewed the Subcommittee’s consideration of a draft National Association of Insurance Commissioners (NAIC) mega-catastrophe plan. The proposal, she said, sets out a multi-layered system for disaster management, in which primary responsibility would fall to consumers and the private industry; secondary responsibility would rest on optional state or regional catastrophe funds; final responsibility would lie with a federal catastrophe backstop should a newly created Federal Natural Catastrophe Commission determine such a need; and states would be required to implement strong mitigation initiatives at every layer of the proposal.
Sen. Redfield said the Subcommittee had completed its substantive review of Layer One and had voted to send its preliminary comments to the NAIC Catastrophe Insurance Working Group prior to the NAIC Winter Meeting in early December. She said legislators would address the other elements of the proposal at the NCOIL Spring Meeting.
NATIONAL FLOOD INSURANCE PROGRAM (NFIP)
Ed Pasterick of the Federal Emergency Management Agency (FEMA) updated the Committee on recent National Flood Insurance Program (NFIP) activity. He said the NFIP had closed approximately 98 percent of flood claims stemming from Hurricanes Katrina and Rita. He noted that states across the country had experienced significant flood events in 2006. There are currently 5.2 million flood policies in force, he said, representing a ten percent growth over last year.
Mr. Pasterick stated, among other things, that pending federal legislation would address properties that do not pay actuarially sound rates, as well as homes that are not primary residences. He commented that a federal proposal to create an NFIP catastrophe reserve fund, which would require the flood program to set aside money each year to offset the next Hurricane Katrina, could be difficult to implement, as the NFIP might not have the funds needed for such a reserve. Regarding the new Congress, Mr. Pasterick said that flood insurance reform was not a particularly partisan issue, and he predicted that there would be little change in the focus of congressional proposals.
SURPLUS LINES INTERSTATE COMPACT PROPOSAL
Steve Stephan of the National Association of Professional Surplus Lines Offices (NAPSLO) overviewed the nature of the surplus lines market and the need for reform. He said brokers are often unaware of which state requirements they should comply with when writing multi-state surplus lines policies, including the proper distribution of surplus lines taxes. Mr. Stephan explained that, initially, only resident surplus lines licenses existed, which meant that a broker had to comply with only his or her domestic state requirements. With the advent of the Gramm-Leach-Bliley Act (GLBA), he said, surplus lines brokers were allowed to obtain additional state licenses, thereby confusing the system.
Regarding taxes, Mr. Stephan said that discrepancies in state surplus lines tax laws—which existed prior to GLBA—had already made it extremely difficult for brokers to comply. He said GLBA exacerbated the problem.
Mr. Stephan reported that H.R. 5637, The Nonadmitted and Reinsurance Reform Act, which would require single-state reporting, would offer a solution for brokers but do nothing to ensure the proper allocation of tax income.
Dan Maher of the Excess Line Association of New York (ELANY) noted that the House of Representatives had passed H.R. 5637 but that it had not been introduced in the Senate. He said more than 60 surplus lines interested parties had been meeting to discuss developing a mechanism for managing multi-state surplus lines requirements, namely creation of an interstate compact. He said interested parties were in the process of, among other things, compiling a study regarding the tax implications of a more streamlined surplus lines system.
In response to a question from Rep. Wald regarding multi-state liability coverage, Mr. Maher said that some states already have allocation formulas that base surplus lines tax distribution on such items as payroll, sales, or number of employees per state. He said the proposed interstate compact would rely on a Web-based system into which a broker would enter data regarding the state-by-state risk of a multi-state insured. Mr. Maher said this information would be aggregated periodically and reported to both the broker and the states. He said this “billing sheet” would tell a broker how much money to send each jurisdiction and would notify states of the taxes they were entitled to collect.
INSURANCE RECEIVERSHIP MODEL ACT (IRMA)
Commissioner Paula Flowers (TN), chair of the NAIC Receivership and Insolvency Task Force, addressed issues regarding IRMA, which she said the NAIC had adopted unanimously in December 2005 following a four-year process. Regarding its possible inclusion in the NAIC accreditation system, Commissioner Flowers said that the system already requires a state to have a “regulatory scheme” for receivership. She said every state had adopted some form of NAIC receivership model law, beginning with the organization’s 1936 version.
Commissioner Flowers said the Receivership and Insolvency Task Force had been asked to propose to the NAIC Financial Regulation Standards & Accreditation (F) Committee receivership standards that might be included in the accreditation system, should the F Committee choose to take such action. She said the idea was to require state adoption of key concepts in IRMA, rather than of the full model act. She commented that these concepts appeared in all previous NAIC receivership models and addressed, among other things:
· stays of action issued by receivership courts
· requiring that receivership proceedings be initiated by an insurance commissioner, with a receivership court granted exclusive jurisdiction
· extending the statute of limitations for actions of a receiver
· prohibiting defenses to receivership claims
· immunity for the receiver
· standards for general financial accounting by the receiver
Commissioner Flowers said receivership law includes provisions not directly related to receivership, such as conservation and rehabilitation language.
Regarding specifics of IRMA, Commissioner Flowers said the model includes optional language for legislatures to consider when reviewing certain controversial issues, such as the ability of a guaranty fund to intervene in a receivership proceeding. She said that IRMA would not address the treatment of large-deductible policies but that the Task Force would be addressing the matter at the NAIC Winter Meeting with the intent of taking some level of decisive action.
Rep. Keiser and Del. Morgan expressed concern that legislators had not participated in IRMA’s development.
Sen. Redfield noted that at the Summer Meeting the Committee had adopted a resolution opposing inclusion of IRMA standards into the accreditation program and committing NCOIL to investigating IRMA’s merits.
David Durden of the Texas Department of Insurance said his state recently adopted IRMA and that the Department had worked closely with legislators.
STATE GUARANTY FUND REFORM
Sen. Leavell said that the issue of guaranty fund reform was important and that at the 2007 Spring Meeting he would sponsor a proposed model law on the issue.
Neil Alldredge of the National Association of Mutual Insurance Companies (NAMIC) identified items of particular concern for small and medium-sized insurers. He said, among other things, that the guaranty fund assessments charged to more moderately sized companies could be burdensome.
Roger Schmelzer of the National Conference of Insurance Guaranty Funds (NCIGF) said the guaranty fund system is based in state statute, which gives legislatures ownership of the matter, and that guaranty fund assessments are ultimately passed along to policyholders.
Mr. Schmelzer gave background on the system. In response to congressional interest in some form of federal insolvency backstop, he said, the NAIC passed a guaranty fund model law in 1969 that all states and the District of Columbia adopted. He said Congress became concerned following the insolvencies of several personal lines auto insurers in the mid-1960s.
Mr. Schmelzer said that $10 billion of the $17 billion that guaranty funds have paid in their 37-year history have occurred in the last five or six years due to the failures of several large commercial lines carriers. He said that relatively new commercial instruments, including large-deductible policies, have complicated the system and “have stretched the original purpose” of guaranty funds.
Barbara Cox, also of NCIGF, explained the workings of guaranty funds. She said priority should be given to the claimants who most rely on their claims payments and explained that a draft NCIGF guaranty fund model law would establish a net worth cap to ensure that those people are paid first. The mechanism used to activate funds should be consistent from state-to-state, she said, and strong restrictions should be in place to prevent reopening already-settled fund payments.
Ms. Cox overviewed the nature of large-deductible insurance policies, which she said are usually related to workers’ compensation. She said an insurer pays an insured the full amount of its claim, including the agreed-upon deductible amount, and then seeks reimbursement from the insured for that deductible. This situation, she noted, is different from how insurers treat standard deductibles, such as those in personal lines policies.
Regarding guaranty fund payments related to large-deductible policies, Ms. Cox said that, under the current system, a guaranty fund will pay the full amount of the claim—as the insolvent insurer would have—but that reimbursement for the deductible does not automatically return to the guaranty fund. She said that it should, and that proposed language being considered by the NAIC would require such guaranty fund reimbursement.
Ms. Cox continued that NCIGF supports strong early access provisions. She explained that these require a receiver to distribute to a guaranty fund the monies from a liquidated estate as soon as possible, thereby improving efficiency and minimizing insurer assessments. Ms. Cox said, among other things, that guaranty funds should be able to intervene in receivership proceedings, since they are generally the largest creditors of a liquidated estate and have a statutory obligation to protect policyholders.
In response to questions from the Committee, Ms. Cox said that NCIGF’s proposed net worth cap could be adjusted in different areas of the country in response to cost-of-living variations and that, in most states, a guaranty fund does cover a policyholder’s loss from any unearned premium, up to a certain threshold.
PROPOSED 2007 COMMITTEE CHARGES
Ms. Thorson reported that proposed 2007 Committee charges were as follows:
· consider a model law regarding statewide building codes
· examine state guaranty fund issues and take a position, as appropriate
· further efforts regarding a national mega-catastrophe system, working with the NAIC and other interested parties, and interact with Congress and the states as needed
· examine issues regarding the Insurance Receivership Model Act (IRMA) and take action, if appropriate
· facilitate and track activity regarding rate modernization, tort reform, credit scoring, and other emerging issues
· monitor and report on activity regarding the National Flood Insurance Program (NFIP)
· monitor State-Federal Relations Committee activity regarding NAIC accreditation issues, as well as development of a surplus lines compact proposal
Ms. Thorson noted that although the Committee in 2006 had discussed a surplus lines compact and proposed changes to the NAIC accreditation system, the State-Federal Relations Committee was scheduled to consider those items in 2007. Ms. Thorson said that the State-Federal Relations Committee was their proper jurisdiction.
Upon a motion made and seconded, the Committee adopted the proposed charges via unanimous voice vote.
ADJOURNMENT
There being no further business, the meeting adjourned at 10:30 a.m.
© National Conference of Insurance Legislators (NCOIL)
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